Signals Emerge It’s Prime Time to Invest in Multifamily

Together with

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📊 Prologis (NYSE: PLD) Q3 Earnings Snapshot:

• Prologis saw a slight Q3 earnings decline due to rising interest rates and more supply.

• Q3 earnings were 80 cents per share, down from $1.36 in Q3 2022.

• Despite the dip, they achieved record rent growth, with rental revenue hitting $5B in the first nine months of 2023.

• CEO Hamid Moghadam remains confident despite geopolitical concerns and possible Federal Reserve interest rate hikes.

• The company is seeing significant growth in data center development.

‘Enormous’ Amount of Capital on Sidelines Means Now Is Time to Buy Multifamily

With strong fundamentals, new construction starts, and a sizable amount of capital on the sidelines, the multifamily sector is attracting the attention of eager investors, saying now is the time to start deploying capital.

Market dynamics: According to John Sebree, the senior vice president and national director of the Multi Housing Division at Marcus & Millichap, the market is seeing an occupancy surge, consistent rent growth, and a housing shortage. Over the recent years, there’s been an influx of new market deliveries, although multifamily starts have decreased by more than 50% from Q4 2022 to Q3 2023. This has led to a minor spike in vacancy rates, but as new units get absorbed, an imminent scarcity will likely drive rents higher.

Capital on deck: Sebree emphasized the vast capital awaiting an opportune moment to re-enter the market. Quoting Lloyd Blankfein, he stressed that investors shouldn’t wait for a market bottom signal but act proactively. With limited deals, he anticipates intensified competition as sidelined capital re-engages. For eager investors, Sebree advised determining their expected cap rates, hinting they’d likely be between 5.5 and 6 in the current market.

Shifting investor interest: Global investors are also considering a shift from the US office sector to residential properties. The American Federation of International Real Estate (AFIRE) predicts investors will increasingly focus on multifamily due to changing market dynamics and the allure of stable returns. This shift reflects growing optimism in the multifamily market and its potential for long-term growth.

➥ THE TAKEAWAY 

New investment horizons: With high occupancy rates, robust rent growth, and the housing shortage, multifamily properties continue to provide stable returns. While challenges such as high interest rates and constrained debt markets persist, the significant amount of capital waiting on the sidelines offers an opening for eager investors to enter the market. As regional market preferences shift towards suburban areas, multifamily assets in these locations may present lucrative investment opportunities for those seeking long-term growth.

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‘Self-Storage King’ Turned Sub-Asset Into a Hot CRE Commodity

The COVID-19 pandemic transformed homes into multi-purpose spaces, highlighting a dire need for more room. This shift elevated the demand for self-storage in the real estate market. Brian Cohen of Andover Properties, holding an 85K unit self-storage portfolio, was ready to seize this opportunity.

Bird’s eye view: At 46, Brian Cohen owns the trademarked “Storage King USA” with over 85,000 self-storage units. Alongside partners Angelo Gordon, Fir Tree Partners, and Blackstone, he’s acquired over 80 properties since 2018. With 157 properties spanning 12 million rentable square feet in 18 states, Andover Properties stands as one of the U.S.’s top private self-storage operators.

The market: Cohen noted a shift in the perception of self-storage facilities. Once utilized by only 7% of the population, it now serves 11%, with people viewing it as an extension of their homes. The pandemic played a pivotal role in amplifying this trend. As more people required space for work or family needs, self-storage facilities offered a cost-effective solution. By 2028, the U.S. self-storage market cap is projected to hit $72 billion, a significant jump from $58 billion in 2023.

Seizing the opportunity: Cohen’s journey began in 2003 when he realized the lack of sophistication in the sector. With the industry still dominated by mom-and-pop operators, Cohen saw the potential for institutional investment and modernization. He began acquiring distressed self-storage properties and implementing institutional management practices to increase income and value.

Acquisition strategy: After initial struggles in acquiring finished self-storage properties, Cohen and partner Schwartz shifted their focus to distressed loans and deeds in lieu of foreclosure. This proved successful, allowing them to take over and reposition assets. The partnership with Angelo Gordon was crucial in expanding Andover Properties’ portfolio.

Institutional approach: Under Cohen’s leadership, Andover Properties implemented institutional management practices to increase income and asset value. This included developing additional density on sites with excess land, focusing on daily management, and occasionally selling performing assets. The result was improved efficiency and execution.

➥ THE TAKEAWAY

Growing the kingdom: While self-storage remains the core of Andover Properties, Cohen recognizes the importance of diversification. The company has ventured into other assets, including manufactured housing, recreational vehicle parks, dry boat parking, car washes, and small bay warehouses. Cohen believes these assets present growth opportunities and address the need for affordable housing.

Proptech Funding Enjoys Momentum Despite Difficult Year

Despite a challenging year for proptech funding, there are signs of hope emerging as the industry moves through the last quarter of 2023.

Funding landscape: The proptech market saw one of the lowest first-half funding totals in recent history, but Q2 provided a glimmer of hope. Investor confidence rose to 6.1 in mid-year 2023, up from 5.4 at the end of 2022, according to MetaProp’s Mid-Year 2023 Global PropTech Confidence Index. Houlihan Lokey (HLI) also reported positive momentum, indicating a potentially stronger 2H23. CRETI reported a decline in funding for 3Q23 YoY, but it was still 11% higher than in 1Q23.

Investor priorities: Proptech companies that have built a strong foundation, efficient operations, low burn rates, high margins, and attractive public market comparisons are receiving prioritized funding. Investors are seeking companies that offer profitability or a clear path to profitability while also demonstrating growth potential. The challenge for founders is striking the right balance between efficiency and growth in a capital-constrained environment.

Funding success stories: Despite the challenging funding landscape, some proptech companies have secured significant investments. Clockworks Analytics, a Boston-based provider of building analytics, closed a funding round of $16.1M. The funding came from Carom Growth Partners, emphasizing the availability of funding for companies with strong market presence and products. Other proptech companies, such as SwiftConnect and Banner, have also secured sizable funding rounds, indicating ongoing interest from venture capital firms.

➥ THE TAKEAWAY

Cautious optimism: While the proptech funding landscape has faced significant challenges in 2023, there are reasons for cautious optimism. Positive momentum in Q2 and increased investor confidence suggest a potentially stronger second half. Proptech companies with a solid foundation, efficient operations, and attractive market comparisons have a higher chance of securing funding. Proptech VCs continue to invest in new companies and existing portfolio companies, focusing on construction and climate technology solutions.

• Opportunity knocks: Brazilian financier Daniel Dantas invests $1B in Miami properties, marking Opportunity’s first venture in US real estate.

• Clearing the clutter: A recent survey found that federal agencies in the US utilize an average of only 25–49% of their HQ capacity, resulting in excess office space, which costs $2B annually.

• Behind the scenes: What’s happening with the San Francisco office market? And who’s to blame when nearly a quarter of downtown offices are vacant? Find out in this exposé from The New Yorker.

• Unlocking experiences: Real estate platform HqO secures over $50 M in Series D funding, bringing its total funding to over $200 M, to expand through mergers and acquisitions.

• Office claws its way back: American work-from-home rates drop to the lowest since the pandemic, with fewer than 26% of households having someone working remotely.

• Foreclosure flop: Pacific: Pacific Life Insurance foreclosed on a Houston office building, Four Westlake Park, for $30M, a significant discount from its original loan of $70M.

• Industrial slowdown: Industrial absorption in the US dropped by around 50% YoY, signaling a pause in the market’s rapid growth, with tenants gaining more power.

• Roblox reels: Roblox (RBLX) employees must work in the office at least three days a week, relocation expenses provided.

• Expanding homeownership: The Biden-Harris Administration proposes $16B for Neighborhood Homes Tax Credit, resulting in 400K homes built/rehabilitated to expand homeownership.

Over the past year, concerns of a recession have grown due to surging interest rates and market volatility. This chart presents the 2024 U.S. economic predictions from Wall Street, Main Street, and the C-Suite.

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